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Limited Liability Companies

Why Principals Need Life Insurance

Limited liability companies. A limited company is a fairly new breed of business the formation of which most states allow. These companies allow for the flexibility of a partnership and the safety of a corporation.

The shareholders are known as members. If a shareholder...or member...dies or becomes disabled the company still can be continued. The duration of the company is determined from the inception.

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Limited Liability Companies

If the principals of limited companies desire to continue the company beyond the set date they can vote to continue it at the expiration of the originally time set...

The principals decide whether or not shares can be transferred or sold usually through the companies' operating agreement but can also be done through a separate agreement. The number of shareholders can be unlimited.

Limited liability companies are a little more complex to set up than partnerships. Although they are legal entities separate from their owners when it comes to taxes assessed they and their owners are one.

They are usually taxed in a similar manner to a partnership, however, the members have the right to choose to be taxed like a corporation. They are set up by filing articles of organization with the state.

Advantages Of Limited Liability Companies

  • The company is taxed through it's members and not as a separate taxpaying entity.
  • Any liability or debt is limited to the assets of the company. Personal assets cannot be attached.
  • Principals can decide whether or not shares can be transferred through an agreement.
  • This is a very flexible and adaptable type of company.
  • The company can easily be set up in a short period of time and at fairly moderate cost.

Disadvantages Of Limited Liability Companies

  • The incomes of members are subject to employee income taxes.
  • There are no tax advantages to installing employee benefit plans.

Limited Liability Companies And Life Insurance

It is important that limited liability companies plan for the possibility of the sudden death or disability of a shareholder or member. The company should have a binding buy-sell agreement which would state that upon the death or disability of a shareholder the stock owned by the deceased would be sold to the surviving members at a prearranged price.

As the company progresses the agreement should be reviewed in order to make certain that the heirs of the deceased gets a fair price for his or her stock...

The big question here is how will this agreement be funded? The most efficient way to do this is to use life insurance. The company would own a policy on each of it's members equal to the value of the shares owned by the particular member.

To put it simply, upon the death of a stockholder the life insurance company pays to the company the face amount of the life insurance policy. The company then uses these funds to purchase the deceased shares from his heirs.

Similarly in the case of disability the company buys disability buy-out policies on each of the members. If a member should become disabled the payment derived from the disability policy would go to the limited liability company which in turn use the funds to buy out the shares of the deceased member. This is also governed by an agreement and is binding...

Whether insurance kicks in because of death or disability everybody is happy. The heirs are happy because they received full value for the shares and the surviving partners are happy because they now own the shares of their deceased or disabled member and the company can continue.

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Limited Liability Companies

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